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Wednesday, August 17, 2011

In Search of...Better eBook Royalty Rates

As a literary agent, I’m deeply immersed in the ever-changing world of eBook publishing.At times, it’s like trying to buy an airline seat at the best price.Policies shift and change, rates shift and change, and the way eBooks are sold shifts and changes.

For example, once upon a time, eBooks were sold like regular books, meaning that Amazon, for example, essentially “owned” the eBooks it was selling, having “bought” them from the publisher at a standard discount.Having “bought” them, Amazon could then sell them at whatever price it chose, ignoring the publisher’s suggested retail price.This, of course, is how Amazon built market for the Kindle, by selling eBooks at a loss.Then publishers changed the game, announcing they were switching to an agency model (I should give credit to Apple here, for essentially forcing publishers into changing the game).In an agency model, Amazon doesn’t “buy” the books from the publisher, but sells them as the publisher’s “agent.”Thus, Amazon is forced to honor the price the publisher sets and currently receives 30% of that price as a commission for the sale.

Under this model, publishers have been trumpeting that they make less money and that authors will make more money if they agree to accept a net royalty, usually set at 25%.In fact, at least one publisher unilaterally started paying authors at that rate, despite what contracts may have said, but then sent out a letter requiring an amendment to continue receiving the new rate.In the drug business, they call this “giving the customer a taste.”Most authors see they are making more money on the net rate and happily sign the amendment.They don’t really ask any questions.Agents, of course, have to wonder, is it really a better deal for the client to make this switch?After all, since when do publishers try to increase the amount of money authors make?

Since the beginning of eBook publishing, agents have sat back and pondered, What do they know that I don’t?After all, publishers have far more information and actual bean-counters and MBAs they can afford to pay big money to ponder the financial impact of switching from a retail-price-based royalty rate to a net one.Agents and certainly authors may not have the same resources.

So I turned to a very bright friend, Ciara Kennedy, who has an actual MBA and mad skills with Excel, and presented her with a letter from a publisher that is telling authors they must agree to an amendment to continue getting the 25% of net rate versus, say, the 15% of retail rate that might be in the contract.She built a dynamic spreadsheet for me that showed me the following:

Based on a $15.00 cover price and a 30% commission to Amazon, the publisher makes $10.50.At 15% of retail, the author earns $2.25.At 25% of net, the author earns $2.63.Hence, net is better.This remains the case up to a commission of 40%, which is the tipping point at which a retail-based rate is equal to the net-based rate.And at 40.14%, the retail rate beats the net rate.

So what should this mean to authors and agents?And why is such a big issue?Well, the answer to the second question is the same as the answer to the question, Why do I want to invest my money rather than keep it under my mattress?Because you want to make money off your money.And you want to make money off your eBooks, since over time they will be the only editions of your book out there.At some point, there will, in fact, be vast, vast libraries of eBooks and the books will never go out of print.Like characters from a Star Trek episode, readers will be able to browse vast electronic libraries and pick and choose what to read.As an author you will want to have your books available, because even if you only earn pennies from each reader, over decades, those pennies will turn into thousands of dollars.But you want to make sure you are making as many pennies as you can.

When I was in high school in 1983, I started working in my local independent bookstore.I packed a lot of returns and looked at a lot of invoices.The standard discount to booksellers then was 42%.Today, that “standard” is more often 50% or higher.And just as that discount got bigger, I have to presume that the commission to Amazon and other sellers will eventually get bigger.Now, publishers will argue that it will get smaller.That as more markets that sell eBooks open up, publishers will be able to demand better deals.I don’t believe it.Amazon already charges a “delivery fee” on top of its commission.Eventually, it will probably offer to drop that for a larger commission.Or some other game-changer will come along and figure out a way to get a better deal, thus increasing commissions to sellers of eBooks, perhaps to the point where authors would be better off back at the old retail-based rate than the new net-based rate.

Additionally, if you read publishers’ contracts, there are rates for nearly every kind of sale.How long will it be before publishers start charging different rates for different types of eBook sales?For example, most contracts include “direct-to-consumer” rates, which used to be for when customers used those little forms in the back of books to order copies directly from the publisher.Because of the additional costs of processing and fulfilling such sales, publishers pay a lower rate to the author.Very soon, if not already, publishers will argue that eBook sales directly from their sites should be at a lower royalty.Agents and authors know, though, that cutting out the middleman means saving a 30% commission, and should fight such rate changes tooth and nail.Publishers should be paying significantly higher rates for sales directly from their websites, e.g., 50% of net, which splits the savings from cutting out the middleman, e.g., Amazon.Publishers will argue that building their website cost money and so they need a bigger piece of the pie.I call, “Bull—!” at such claims.Publishers have already built those sites and they would with or without a bigger piece of the pie. Their costs are amortized over thousands and thousands of titles and, more importantly, they are saving money on printing, paper, and binding and on warehousing and shipping on all of those books they let go OP other than the eBook edition.Let them put those savings into the website development and pay a fair rate to the author.

There are also rates that change over time, often escalating.Yet most eBook rates do not escalate, and that’s one of the bigger problems with them.Publishers have made acquiring eBook rights a deal-breaker across the board.Printed books are going away sooner than later (already many publishers have eBook-original lists), so having eBook rights are a must.But why doesn’t the eBook royalty rate escalate as sales increase and increase, just as the printed-book rates did?I have yet to hear any argument that justifies not raising them.All I have ever heard is “it’s a deal-breaker, Andy.”That needs to change.In fact, I would argue that, over time, the publisher’s share from eBook sales should reduce significantly.However, I don’t imagine that publishers will ever agree to pay 75% of net to authors.But I do think we can and should get to 50% of net quickly, though I do not look forward to trying to define “net,” what with Amazon charging fifteen cents per megabyte as a delivery fee for eBooks and no doubt looking for other ways to carve a bigger piece out of the pie.

So where does this leave authors and agents trying to decide whether or not to sign an amendment that takes them from a 15% of retail rate to a 25% of net rate?I’d say there are few things one should do:

Include language that states the author will be paid based on the actual commission to resellers, before deductions for charges such as Amazon’s delivery charge, such commission not to be accounted for at greater than 40%.In other words, even if the commission rose to 50%, the author’s royalties would be calculated as though it were 40%.

Ask that direct-to-consumer sales via the Publisher’s own website be at a rate greater than 25% of net, ideally 50% of net.

Ask for escalators similar to hardcover escalators, e.g., 25% of net on the first 5,000 copies sold, 37.5% of net on the next 5,000 copies sold, and 50% of net thereafter.

Always include renegotiation language following the first two years and at any point thereafter should Publisher’s standard terms improve to the Author’s advantage.

Of course, not all authors or agents will succeed at getting these terms, but the sooner we start asking, the sooner we might get there.

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